FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ___________ Commission file number: 0-3683 TRUSTMARK CORPORATION State or other jurisdiction of (I.R.S. Employer incorporation or organization Identification No.) Mississippi 64-0471500 Trustmark Corporation 248 East Capitol Street Jackson, MS 39201 (601) 354-5111 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of July 31, 2001. Title Outstanding Common stock, no par value 64,578,226
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS Trustmark Corporation and Subsidiaries Consolidated Balance Sheets ($ in thousands) <TABLE> <CAPTION> (Unaudited) June 30, December 31, 2001 2000 ----------- ----------- Assets <S> <C> <C> Cash and due from banks (noninterest-bearing) $ 284,791 $ 298,651 Federal funds sold and securities purchased under reverse repurchase agreements 12,892 47,849 Trading account securities - 990 Securities available for sale (at fair value) 1,274,996 1,119,643 Securities held to maturity (fair value: $940,801 - 2001; $1,021,444 - 2000) 915,983 1,005,455 Loans 4,359,608 4,143,933 Less allowance for loan losses 73,939 65,850 ----------- ----------- Net loans 4,285,669 4,078,083 Premises and equipment 94,803 80,692 Intangible assets 93,416 66,381 Other assets 194,479 189,244 ----------- ----------- Total Assets $ 7,157,029 $ 6,886,988 =========== =========== Liabilities Deposits: Noninterest-bearing $ 974,565 $ 952,696 Interest-bearing 3,377,340 3,105,722 ------------- ------------ Total deposits 4,351,905 4,058,418 Federal funds purchased 524,313 435,262 Securities sold under repurchase agreements 706,892 819,751 Short-term borrowings 390,074 632,964 Long-term FHLB advances 450,000 250,000 Other liabilities 66,034 60,952 ------------- ------------ Total Liabilities 6,489,218 6,257,347 Commitments and Contingencies Shareholders' Equity Common stock, no par value: Authorized: 250,000,000 shares Issued and outstanding: 64,914,026 shares - 2001; 64,755,022 shares - 2000 13,524 13,491 Capital surplus 92,347 94,229 Retained earnings 547,585 512,107 Accumulated other comprehensive income, net of tax 14,355 9,814 ------------- ------------ Total Shareholders' Equity 667,811 629,641 ------------- ------------ Total Liabilities and Shareholders' Equity $ 7,157,029 $ 6,886,988 ============= ============ </TABLE> See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries Consolidated Statements of Income ($ in thousands except per share data) (Unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, -------------------- ---------------------- 2001 2000 2001 2000 -------- -------- --------- --------- Interest Income <S> <C> <C> <C> <C> Interest and fees on loans $ 88,794 $ 85,443 $ 173,801 $ 168,185 Interest on securities: Taxable interest income 32,821 33,375 67,175 66,480 Interest income exempt from federal income taxes 2,496 1,875 4,577 3,699 Interest on federal funds sold and securities purchased under reverse repurchase agreements 358 550 735 925 -------- -------- --------- --------- Total Interest Income 124,469 121,243 246,288 239,289 Interest Expense Interest on deposits 35,116 30,256 69,454 58,339 Interest on federal funds purchased and securities sold under repurchase agreements 12,964 17,435 28,339 36,287 Other interest expense 10,018 13,802 23,680 25,002 -------- -------- --------- --------- Total Interest Expense 58,098 61,493 121,473 119,628 -------- -------- --------- --------- Net Interest Income 66,371 59,750 124,815 119,661 Provision for loan losses 2,400 3,198 4,800 5,316 -------- -------- --------- --------- Net Interest Income After Provision for Loan Losses 63,971 56,552 120,015 114,345 Noninterest Income Service charges on deposit accounts 11,948 10,473 22,371 20,355 Other account charges, fees and commissions 9,237 9,174 18,177 18,386 Mortgage servicing fees 4,150 3,664 8,243 7,338 Trust service income 3,442 3,825 6,969 7,293 Securities gains 368 3,921 368 8,562 Other income 1,539 2,963 6,889 4,137 -------- -------- --------- --------- Total Noninterest Income 30,684 34,020 63,017 66,071 Noninterest Expense Salaries and employee benefits 27,536 24,987 53,725 50,433 Net occupancy - premises 2,837 2,578 5,433 5,158 Equipment expense 3,951 3,886 7,742 7,616 Services and fees 7,332 6,594 14,087 13,308 Amortization of intangible assets 3,017 2,247 5,294 4,499 Other expense 8,066 8,650 14,947 15,354 -------- -------- --------- --------- Total Noninterest Expense 52,739 48,942 101,228 96,368 -------- -------- --------- --------- Income Before Income Taxes and Cumulative Effect of a Change in Accounting Principle 41,916 41,630 81,804 84,048 Income taxes 14,637 14,624 28,641 28,902 -------- -------- --------- --------- Income Before Cumulative Effect of a Change in Accounting Principle 27,279 27,006 53,163 55,146 Cumulative effect of a change in accounting principle, net of tax - - - (2,464) -------- -------- --------- --------- Net Income $ 27,279 $ 27,006 $ 53,163 $ 52,682 ======== ======== ========= ========= Earnings Per Share Basic and diluted earnings per share before cumulative effect of a change in accounting principle $ 0.41 $ 0.39 $ 0.81 $ 0.79 Cumulative effect of a change in accounting principle, net of tax - - - (0.03) -------- -------- --------- --------- Earnings per share - basic and diluted $ 0.41 $ 0.39 $ 0.81 $ 0.76 ======== ======== ========= ========= </TABLE> See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity ($ in thousands) (Unaudited) <TABLE> <CAPTION> 2001 2000 --------- --------- <S> <C> <C> <C> Balance, January 1, $ 629,641 $ 655,756 Comprehensive income: Net income per consolidated statements of income 53,163 52,682 Net change in unrealized gains/losses on securities available for sale, net of tax 4,618 (7,383) Net change in accumulated net losses on cash flow hedges, net of tax (77) - --------- --------- Comprehensive income 57,704 45,299 Cash dividends paid (17,685) (17,316) Common stock issued in business combination 46,022 - Repurchase and retirement of common stock (47,871) (29,295) --------- --------- Balance, June 30, $ 667,811 $ 654,444 ========= ========= </TABLE> See notes to consolidated financial statements.
Trustmark Corporation and Subsidiaries Consolidated Statements of Cash Flows ($ in thousands) (Unaudited) <TABLE> <CAPTION> Six Months Ended June 30, ------------------------ 2001 2000 --------- --------- Operating Activities <S> <C> <C> Net income $ 53,163 $ 52,682 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 4,800 5,316 Depreciation and amortization 11,450 10,720 Net amortization (accretion) of securities 331 (844) Securities gains (368) (8,562) Gains on sales of loans (5,684) (2,190) Cumulative effect of a change in accounting principle - 3,820 Net decrease in loans held for sale 221,002 14,540 Proceeds from sales of trading securities 990 130,575 Net increase in intangible assets (10,235) (4,295) Net decrease in deferred income taxes 4,194 2,967 Net increase in other assets (4,080) (13,435) Net (decrease) increase in other liabilities (1,571) 6,010 Other operating activities, net 1,058 434 --------- --------- Net cash provided by operating activities 275,050 197,738 Investing Activities Proceeds from calls and maturities of securities held to maturity 295,780 103,025 Proceeds from calls and maturities of securities available for sale 90,478 75,157 Proceeds from sales of securities available for sale 11,983 15,209 Purchases of securities held to maturity - (98,974) Purchases of securities available for sale (353,667) (158,603) Net decrease (increase) in federal funds sold and securities purchased under reverse repurchase agreements 93,261 (30,510) Net increase in loans (129,096) (49,097) Purchases of premises and equipment (6,850) (6,321) Proceeds from sales of premises and equipment 114 11 Proceeds from sales of other real estate 1,055 1,894 Cash paid in business combination (38,175) - --------- --------- Net cash used by investing activities (35,117) (148,209) Financing Activities Net (decrease) increase in deposits (121,539) 35,749 Net decrease in federal funds purchased and securities sold under repurchase agreements (23,808) (172,552) Net (decrease) increase in other borrowings (242,890) 145,710 Proceeds from long-term FHLB advances 200,000 - Cash dividends (17,685) (17,316) Common stock transactions, net (47,871) (29,295) --------- --------- Net cash used by financing activities (253,793) (37,704) --------- --------- (Decrease) increase in cash and cash equivalents (13,860) 11,825 Cash and cash equivalents at beginning of period 298,651 279,957 --------- --------- Cash and cash equivalents at end of period $ 284,791 $ 291,782 ========= ========= </TABLE> See notes to consolidated financial statements.
TRUSTMARK CORPORATION & SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION AND PRINCIPLES OF CONSOLIDATION The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of Management, all adjustments (consisting of normal recurring accruals) considered necessary for the fair presentation of these consolidated financial statements have been included. The notes included herein should be read in conjunction with the notes to the consolidated financial statements included in Trustmark Corporation's (Trustmark) 2000 annual report on Form 10-K. The consolidated financial statements include the accounts of Trustmark and its wholly-owned banking subsidiaries, Trustmark National Bank (TNB) and Somerville Bank & Trust Company. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to prior period amounts to conform to the current period presentation. NOTE 2 - BUSINESS COMBINATIONS On April 6, 2001, Barret Bancorp, Inc. (Barret) of Barretville, Tennessee, was merged with Trustmark in a business combination accounted for by the purchase method of accounting. Barret was the holding company for the former Peoples Bank in Barretville and Somerville Bank and Trust in Somerville, Tennessee. At the merger date, Barret had approximately $307 million in gross loans, $508 million in total assets and $414 million in total deposits. Trustmark paid $51.2 million and issued 2.4 million shares of common stock, valued at approximately $46 million, in connection with the merger. Excess cost over net assets acquired equaled $22.1 million, of which $10.5 million has been allocated to core deposits and $11.5 million has been allocated to goodwill. The results of operations, which are not material, have been included in the financial statements from the merger date. NOTE 3 - LOANS The following table summarizes the activity in the allowance for loan losses for the six month periods ended June 30, ($ in thousands): 2001 2000 -------- -------- Balance at beginning of year $ 65,850 $ 65,850 Provision charged to expense 4,800 5,316 Loans charged off (9,233) (8,534) Recoveries 3,814 3,218 Allowance applicable to loans of acquired bank 8,708 - -------- -------- Balance at end of period $ 73,939 $ 65,850 ======== ======== At June 30, 2001 and 2000, the carrying amounts of nonaccrual loans were $25.5 million and $16.2 million, respectively. Included in these nonaccrual loans at June 30, 2001 and 2000, are loans that are considered to be impaired, which totaled $19.8 million and $11.9 million, respectively. As a result of direct write-downs, the specific allowance related to these impaired loans was not material. The average carrying amounts of impaired loans during the second quarter of 2001 and 2000 were $19.3 million and $12.1 million, respectively. No material amounts of interest income were recognized on impaired loans or nonaccrual loans for the second quarter of 2001 or 2000. The gross amount of interest income that would have been recorded on nonaccrual loans, if all such loans had been accruing interest at their contractual rates, was also immaterial.
NOTE 4 - CONTINGENCIES Trustmark and its subsidiaries are parties to lawsuits and other claims that arise in the ordinary course of business; some of the lawsuits assert claims related to the lending, collection, servicing, investment, trust and other business activities; and some of the lawsuits allege substantial claims for damages. The cases are being vigorously contested. In the regular course of business, Management evaluates estimated losses or costs related to litigation, and provision is made for anticipated losses whenever Management believes that such losses are probable and can be reasonably estimated. At the present time, Management believes, based on the advice of legal counsel, that the final resolution of pending legal proceedings will not have a material impact on Trustmark's consolidated financial position or results of operations. NOTE 5 - EARNINGS PER SHARE Basic earnings per share (EPS) is computed by dividing net income by the weighted average shares of common stock outstanding. Diluted EPS is computed by dividing net income by the weighted average shares of common stock outstanding, adjusted for the effect of stock options outstanding during the period. The following table reflects weighted average shares used to calculate basic and diluted EPS for the periods presented: Six Months Ended June 30, --------------------------- 2001 2000 ---------- ---------- Weighted Average Shares Outstanding Basic 65,271,791 69,351,577 Diluted 65,367,915 69,390,216 NOTE 6 - STATEMENTS OF CASH FLOWS Trustmark paid income taxes approximating $21.1 million and $19.3 million during the six months ended June 30, 2001 and 2000, respectively. Interest paid on deposit liabilities and other borrowings approximated $123.9 million in the first six months of 2001 and $118.3 million in the first six months of 2000. For the six months ended June 30, 2001 and 2000, noncash transfers from loans to foreclosed properties were $2.9 million and $3.3 million, respectively. Assets acquired as a result of the Barret business combination totaled $508 million, while liabilities assumed totaled $422 million. NOTE 7 - RECENT PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations." SFAS No. 141 addresses financial accounting and reporting for business combinations and supersedes Accounting Principles Board (APB) Option No. 16, "Business Combinations" and SFAS No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of this statement are to be accounted for using the purchase method. The provisions of this statement apply to all business combinations initiated after June 30, 2001. Trustmark will apply the provisions of this statement in future business combinations. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." This statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." It addresses how intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the financial statements. The provisions of this statement are required to be applied starting with fiscal years beginning after December 15, 2001. At the date of adoption, Trustmark expects to have unamortized goodwill in the amount of $22.1 million and unamortized identifiable intangible assets in the amount of $75.6 million. Amortization expense for the six months ended June 30, 2001 was $594 thousand related to goodwill and $4.7 million related to identifiable intangible assets. The impact of adoption on Trustmark's consolidated financial position and results of operation have not yet been determined. NOTE 8 - SEGMENT INFORMATION Trustmark has three reportable segments: Retail Banking, Commercial Banking and Financial Services. Retail Banking delivers a full range of financial products and services to individuals and small businesses through Trustmark's extensive branch network. Commercial Banking provides various financial products and services to corporate and middle market clients. Included among these products and services are specialized services for commercial and residential real estate development lending, indirect auto financing and other specialized lending services. Financial Services includes trust and fiduciary services, discount brokerage services, insurance services, as well as credit card and mortgage services. Also included in this segment is a selection of investment management services including Trustmark's proprietary mutual fund family. Treasury & Other consists of asset/liability management activities that include the investment portfolio and the related gains (losses) on sales of securities. Treasury & Other also includes expenses such as corporate overhead and amortization of intangible assets. The following tables disclose financial information by segment for the periods ended June 30, 2001 and 2000, ($ in thousands):
Trustmark Corporation Segment Information (000's in thousands) <TABLE> <CAPTION> Retail Commercial Financial Treasury Banking Banking Services & Other Total ---------- ---------- --------- ---------- ---------- For the three months ended June 30, 2001 - ---------------------------------------- <S> <C> <C> <C> <C> <C> Net interest income from external customers $ 5,629 $ 32,029 $ 11,462 $ 17,251 $ 66,371 Internal funding 30,756 (20,626) (2,401) (7,729) - ---------- ---------- -------- ---------- ---------- Net interest income 36,385 11,403 9,061 9,522 66,371 Provision for loan losses 1,459 872 504 (435) 2,400 ---------- ---------- -------- ---------- ---------- Net interest income after provision for loan losses 34,926 10,531 8,557 9,957 63,971 Noninterest income 13,799 127 15,541 1,217 30,684 Noninterest expense 31,740 3,772 13,873 3,354 52,739 ---------- ---------- -------- ---------- ---------- Income before taxes 16,985 6,886 10,225 7,820 41,916 Income taxes 5,865 2,378 3,604 2,790 14,637 ---------- ---------- -------- ---------- ---------- Segment net income $ 11,120 $ 4,508 $ 6,621 $ 5,030 $ 27,279 ========== ========== ======== ========== ========== Selected Financial Information Average assets $2,391,651 $1,593,980 $852,496 $2,329,845 $7,167,972 Depreciation and amortization $ 1,256 $ 55 $ 2,132 $ 2,789 $ 6,232 For the three months ended June 30, 2000 - ---------------------------------------- Net interest income from external customers $ 7,911 $ 31,777 $ 11,620 $ 8,442 $ 59,750 Internal funding 22,979 (22,604) (4,385) 4,010 - ---------- ---------- -------- ---------- ---------- Net interest income 30,890 9,173 7,235 12,452 59,750 Provision for loan losses 2,369 266 563 - 3,198 ---------- ---------- -------- ---------- ---------- Net interest income after provision for loan losses 28,521 8,907 6,672 12,452 56,552 Noninterest income 12,761 159 15,723 5,377 34,020 Noninterest expense 27,558 3,818 11,937 5,629 48,942 ---------- ---------- -------- ---------- ---------- Income before taxes 13,724 5,248 10,458 12,200 41,630 Income taxes 4,738 1,813 3,648 4,425 14,624 ---------- ---------- -------- ---------- ---------- Segment net income $ 8,986 $ 3,435 $ 6,810 $ 7,775 $ 27,006 ========== ========== ======== ========== ========== Selected Financial Information Average assets $2,129,390 $1,504,023 $870,132 $2,241,928 $6,745,473 Depreciation and amortization $ 1,058 $ 52 $ 1,423 $ 2,828 $ 5,361 </TABLE>
Trustmark Corporation Segment Information (000's in thousands) <TABLE> <CAPTION> Retail Commercial Financial Treasury Banking Banking Services & Other Total ---------- ---------- --------- ---------- ---------- For the six months ended June 30, 2001 - -------------------------------------- <S> <C> <C> <C> <C> <C> Net interest income from external customers $ 8,122 $ 64,690 $ 21,854 $ 30,149 $ 124,815 Internal funding 59,655 (43,301) (5,225) (11,129) - ---------- ---------- -------- ---------- ---------- Net interest income 67,777 21,389 16,629 19,020 124,815 Provision for loan losses 2,587 1,641 1,147 (575) 4,800 ---------- ---------- -------- ---------- ---------- Net interest income after provision for loan losses 65,190 19,748 15,482 19,595 120,015 Noninterest income 26,282 259 33,691 2,785 63,017 Noninterest expense 60,885 7,518 26,935 5,890 101,228 ---------- ---------- -------- ---------- ---------- Income before taxes 30,587 12,489 22,238 16,490 81,804 Income taxes 10,558 4,313 7,786 5,984 28,641 ---------- ---------- -------- ---------- ---------- Segment net income $ 20,029 $ 8,176 $ 14,452 $ 10,506 $ 53,163 ========== ========== ======== ========== ========== Selected Financial Information Average assets $2,225,059 $1,580,790 $845,737 $2,359,034 $ 7,010,620 Depreciation and amortization $ 2,313 $ 106 $ 3,841 $ 5,190 $ 11,450 For the six months ended June 30, 2000 - -------------------------------------- Net interest income from external customers $ 16,432 $ 62,206 $ 23,091 $ 17,932 $ 119,661 Internal funding 45,947 (43,992) (9,246) 7,291 - ---------- ---------- -------- ---------- ---------- Net interest income 62,379 18,214 13,845 25,223 119,661 Provision for loan losses 3,523 763 1,030 - 5,316 ---------- ---------- -------- ---------- ---------- Net interest income after provision for loan losses 58,856 17,451 12,815 25,223 114,345 Noninterest income 24,482 316 29,670 11,603 66,071 Noninterest expense 56,333 7,645 23,844 8,546 96,368 ---------- ---------- -------- ---------- ---------- Income before income taxes and cumulative effect of a change in accounting principle 27,005 10,122 18,641 28,280 84,048 Income taxes 9,323 3,495 6,527 9,557 28,902 ---------- ---------- -------- ---------- ---------- Income before cumulative effect of a change in accounting principle 17,682 6,627 12,114 18,723 55,146 Cumulative effect of a change in accounting principle - - - (2,464) (2,464) ---------- ---------- -------- ---------- ---------- Segment net income $ 17,682 $ 6,627 $ 12,114 $ 16,259 $ 52,682 ========== ========== ======== ========== ========== Selected Financial Information Average assets $2,144,688 $1,486,673 $864,574 $2,264,341 $6,760,276 Depreciation and amortization $ 2,100 $ 106 $ 2,804 $ 5,710 $ 10,720 </TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following provides a narrative discussion and analysis of significant changes in Trustmark Corporation's (Trustmark) financial condition and results of operations. This discussion should be read in conjunction with the consolidated financial statements and the supplemental financial data included elsewhere in this report. The Private Securities Litigation Reform Act evidences Congress' determination that the disclosure of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements by Management. Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements with respect to the adequacy of the allowance for loan losses; the effect of legal proceedings on Trustmark's financial condition, results of operations and liquidity; and market risk disclosures. Although Management of Trustmark believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. Such forward-looking statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks materialize, or should any such underlying assumptions prove to be significantly different, actual results may vary significantly from those anticipated, estimated, projected or expected. FINANCIAL HIGHLIGHTS For the second quarter of 2001, Trustmark announced record basic and diluted earnings per share of $0.41, compared with $0.39 for the second quarter of 2000, an increase of 5.1%. Excluding a net nonrecurring gain of $0.03 per share in the second quarter of 2000, earnings per share increased 13.9%. Net income totaled $27.3 million in the second quarter of 2001. This level of performance resulted in a return on average assets of 1.53% and a return on average equity of 16.29%. For the six months ended June 30, 2001, net income totaled $53.2 million, resulting in a return on average assets of 1.53% and a return on average equity of 16.53%. At June 30, 2001, Trustmark reported total loans of $4.360 billion, total assets of $7.157 billion, total deposits of $4.352 billion and shareholders' equity of $667.8 million. BUSINESS COMBINATIONS On April 6, 2001, Barret Bancorp, Inc. (Barret) of Barretville, Tennessee, was merged with Trustmark in a business combination accounted for by the purchase method of accounting. Barret was the holding company for the former Peoples Bank in Barretville and Somerville Bank and Trust in Somerville, Tennessee. At the merger date, Barret had approximately $307 million in gross loans, $508 million in total assets and $414 million in total deposits. The results of operations, which are not material, have been included in the financial statements from the merger date. RESULTS OF OPERATIONS Net Interest Income Net interest income (NII) is the principal component of Trustmark's income stream and represents the difference or spread between interest and fee income generated from earning assets and the interest expense paid on deposits and borrowed funds. Fluctuations in interest rates, as well as volume and mix changes in earning assets and interest-bearing liabilities can materially impact net interest income. The net interest margin (NIM) is computed by dividing fully taxable equivalent NII by average interest-earning assets and measures how effectively Trustmark utilizes its interest-earning assets in relationship to the interest cost of funding them. The fully taxable equivalent (FTE) yield on tax-exempt income has been computed based on a 35% federal marginal tax rate for
the periods shown. The following table summarizes Trustmark's NIM for the periods shown: Six Months Ended June 30, ---------------- 2001 2000 ----- ----- Yield on interest-earning assets-FTE 7.84% 7.85% Rate on interest-bearing liabilities 3.79% 3.86% ----- ----- Net interest margin-FTE 4.05% 3.99% ===== ===== Trustmark's NII has benefited from its negative gap position in a time of declining interest rates and the merger with Barret. For the six months ended June 30, 2001, NII increased $5.2 million, or 4.3%, compared with the same period in 2000. Average interest-earning assets for the first six months of 2001 were $6.467 billion, compared to $6.234 billion for the first six months of 2000, an increase of 3.7%. The average interest-earning asset growth is attributable to a 4.1% increase in average loans and a 3.8% increase in average securities, when comparing these periods. This combination resulted in growth in interest income of $7.0 million, or 2.9%, when comparing the first six months of 2001 to the same period in 2000. Interest expense for the six months ended June 30, 2001, increased $1.8 million, or 1.5%, when compared to the same time period in 2000. Trustmark has taken advantage of its negative gap position in a period of declining interest rates by replacing higher priced borrowings with deposits. While average interest-bearing deposits increased 10.1%, when comparing the first six months of 2001 with the same period in 2000, average federal funds purchased and securities sold under repurchase agreements decreased 9.3% and average borrowings decreased 3.4%. NII is also impacted by Trustmark's ongoing capital management plan, which utilizes available funds to repurchase common stock instead of funding earning assets. During 2001, Trustmark continues to be heavily involved in this program as demonstrated by the repurchase of $47.8 million in common stock. Provision for Loan Losses Trustmark's provision for loan losses totaled $4.8 million during the first six months of 2001, compared to $5.3 million in the same period in 2000. The provision to average loans was 0.23% for the first six months of 2001, compared with 0.26% for the same period in 2000. The provision for loan losses reflects Management's assessment of the adequacy of the allowance for loan losses to absorb inherent charge-offs in the loan portfolio. The provision for each period is dependent upon many factors including loan growth, net charge-offs, changes in the composition of the loan portfolio, delinquencies, Management's assessment of loan portfolio quality, the value of collateral and general economic factors. Trustmark's provision for loan losses to average loans continues to remain favorable because of asset quality and compares favorably with its peer banks. Noninterest Income Noninterest income consists of revenues generated from a broad range of banking, insurance and investment products and services. For the first six months of 2001, noninterest income decreased by $3.1 million, or 4.6%. Excluding securities gains, noninterest income would have increased $5.1 million, or 8.9%. Service charges for deposit products and services continue to be the single largest component of noninterest income. Income from service charges on deposit accounts increased $2.0 million, or 9.9% during the first six months of 2001, when compared to the first six months of 2000. Revised fee structures for certain deposit services, the overall growth in fee-based deposit accounts, transaction volume and an intensified effort to collect fees resulted in the increase. The Barret business combination contributed $528 thousand to the growth in service charge income.
The second largest component of noninterest income is other account charges, fees and commissions. In the first six months of 2001, this category decreased $209 thousand, or 1.1%, when compared to the same period in 2000. Declines in brokerage fees, primarily resulting from unfavorable market conditions and ATM fees more than offset increases from credit card fees and insurance commissions. Mortgage servicing fees grew $905 thousand or 12.3% in the first half of 2001, when compared to the same period in 2000. Reductions in interest rates have resulted in an increase in mortgages originated and purchased, leading to growth in mortgages serviced. Trustmark serviced $4.0 billion in mortgage loans at June 30, 2001. Trust service income decreased slightly in the first six months of 2001, compared to the same period in 2000. Current market conditions have contributed to a decline in corporate trust fees and advisory fees during the first six months of 2001, compared to the same period in 2000. At June 30, 2001, Trustmark, which continues to be one of the largest providers of asset management services in Mississippi, held assets under administration of $6.8 billion. Other income totaled $6.9 million for the first six months of 2001, compared to $4.1 million during the same period in 2000. The primary component of this increase is a $3.9 million gain from the sale of $192 million in mortgage loans with significant prepayment risk that occurred during the first quarter of 2001. This was offset by $1.3 million in nontaxable benefits received on a key man life insurance policy, which occurred during the first quarter of 2000. During the first six months of 2001, $368 thousand in security transactions were recognized. During the first six months of 2000, securities gains totaled $8.6 million, which were realized from sales of AFS equity securities and were used to offset the effect of adopting SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Noninterest Expense Total noninterest expense increased $4.9 million, or 5.0%, in the first six months of 2001, compared to the same period in 2000. The Barret business combination contributed $2.1 million during the second quarter of 2001, primarily in salaries and employee benefits. The control of noninterest expense is a management priority. The primary measure of the effectiveness of noninterest expense control is the efficiency ratio, which is calculated by dividing total noninterest expense by tax-equivalent net interest income plus noninterest income. The efficiency ratio measures the percentage of revenues that are absorbed by costs of production. For the first six months of 2001, Trustmark's efficiency ratio, excluding nonrecurring items, was 53.69%, compared to 52.89% for the same period in 2000. Salaries and employee benefits were $53.7 million in the first six months of 2001, compared to $50.4 million in the same period in 2000, a net increase of $3.3 million, or 6.5%. Excluding the Barret business combination, this increase would have been $2.0 million, or 3.9%. Amortization of intangibles increased $795 thousand, or 17.7%, primarily from the amortization of mortgage servicing rights. This increased amortization has resulted from increased prepayment risk during the current falling interest rate environment. All other categories in noninterest expense remained well controlled as evidenced by only slight increases during the first six months of 2001, when compared to the same period in 2000. Management will continue to closely monitor the level of noninterest expense as part of its strategic plan effort to improve the profitability of Trustmark. Income Taxes For the six months ended June 30, 2001, Trustmark's combined effective tax rate was 35.0%, compared with 34.4% for the same period in 2000. The increase in Trustmark's effective tax rate for 2001 is due primarily to the receipt of non-taxable life insurance proceeds in the first six months of 2000.
SHAREHOLDERS' EQUITY In order to enhance shareholder value, Trustmark initiated a capital management plan during 1998. This plan included a number of initiatives designed to improve earnings per share and return on equity, two of the most significant factors impacting shareholder value. Two of these initiatives were the implementation of a common stock repurchase program and the evaluation of Trustmark's dividend payout ratio. Shareholders' equity increased to $667.8 million at June 30, 2001, from $629.6 million at December 31, 2000, primarily from the Barret business combination. As a result of these initiatives, Trustmark's return on average equity increased to 16.53% at June 30, 2001, from 16.10% at June 30, 2000. The utilization of this capital management plan has allowed Trustmark to increase shareholder value, while maintaining sufficient regulatory capital levels. Common Stock Repurchase Program In November 1998, Trustmark implemented the first phase of its capital management plan by authorizing the repurchase of up to 7.5%, or 5.46 million shares of common stock. This program was completed in the third quarter of 2000, with purchases totaling $112.4 million. During the third quarter of 2000, an additional plan was authorized by Trustmark's Board of Directors to repurchase an additional 5.0%, or approximately 3.4 million shares of common stock. Also, during the third quarter, Trustmark's Board of Directors authorized the repurchase of 3.35 million shares in a privately negotiated transaction. At June 30, 2001, Trustmark had repurchased $49.4 million in common stock under the latest plan, of which, $47.8 million were repurchased during the first six months of 2001. The new plan continues to be subject to market conditions and management discretion. Since implementation of these plans, Trustmark has purchased approximately 11.1 million shares of common stock totaling over $220 million. Dividends An increased dividend payout ratio is another means by which Trustmark has enhanced shareholder value. Trustmark's dividend payout ratio was 33.3% for the six months ended June 30, 2001, and 32.9% for the same period in 2000. Dividends for the first half of 2001 were $0.27 per share, an increase of 8.0%, when compared with dividends of $0.25 per share for the same period in 2000. Regulatory Capital Trustmark and Trustmark National Bank (TNB) are subject to minimum capital requirements, which are administered by various Federal regulatory agencies. These capital requirements, as defined by Federal guidelines, involve quantitative and qualitative measures of assets, liabilities and certain off-balance sheet instruments. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the financial statements of both Trustmark and TNB. Management believes, as of June 30, 2001, that Trustmark and TNB meet all capital adequacy requirements to which they are subject. At June 30, 2001, the most recent notification from the Office of the Comptroller of the Currency (OCC) categorized TNB as well capitalized. To be categorized in this manner, TNB must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios (defined in applicable regulations) as set forth in the table below. There are no significant conditions or events that have occurred since the OCC's notification that Management believes have affected TNB's present classification.
Actual and minimum regulatory capital amounts and ratios at June 30, 2001, for Trustmark and TNB are as follows ($ in thousands): <TABLE> <CAPTION> Actual Minimum Regulatory Regulatory Capital Capital Required ------------------ ------------------ Amount Ratio Amount Ratio -------- ------ -------- ------ Total Capital (to Risk Weighted Assets) <S> <C> <C> <C> <C> Trustmark Corporation $665,838 15.10% $352,693 8.00% Trustmark National Bank $637,510 14.83% $343,820 8.00% Tier 1 Capital (to Risk Weighted Assets) Trustmark Corporation $610,015 13.84% $176,347 4.00% Trustmark National Bank $583,598 13.58% $171,910 4.00% Tier 1 Capital (to Average Assets) Trustmark Corporation $610,015 8.56% $213,736 3.00% Trustmark National Bank $583,598 8.36% $209,514 3.00% </TABLE> EARNING ASSETS Earning assets are comprised of securities, loans, federal funds sold, securities purchased under resale agreements and trading account assets, which are the primary revenue streams for Trustmark. At June 30, 2001, earning assets were $6.563 billion, or 91.71% of total assets, compared with $6.318 billion, or 91.74% of total assets at December 31, 2000, an increase of $245.6 million, or 3.9%. This increase is the direct result of the Barret business combination, which more than offset the sale of mortgage loans, which was completed during the first quarter of 2001. Securities The securities portfolio is utilized to provide Trustmark with a quality investment alternative, a stable source of interest income, as well as collateral for pledges on public deposits and securities sold under agreements to repurchase. At June 30, 2001, Trustmark's securities portfolio totaled $2.191 billion, compared to $2.125 billion at December 31, 2000, an increase of $65.9 million, or 3.1%. Contributing to this increase was the first quarter reinvestment from the sale of mortgage loans ($192 million) and the Barret business combination ($104 million), which was completed during the second quarter of 2001. Excluding these items, the securities portfolio would have decreased by approximately $230 million. Management has utilized this liquidity to reduce wholesale funding reliance, as well as fund the capital management plan during a period when market yields have been declining. AFS securities are carried at their estimated fair value, with unrealized gains or losses recognized, net of taxes, in accumulated other comprehensive income, a separate component of shareholders' equity. At June 30, 2001, AFS securities totaled $1.275 billion, which represented 58.2% of the securities portfolio, compared to $1.120 billion or 52.7% at December 31, 2000. HTM securities are carried at amortized cost and represent those securities that Trustmark both positively intends and has the ability to hold to maturity. At June 30, 2001, HTM securities totaled $916 million and represented 41.8% of the total portfolio, compared with $1.005 billion or 47.3% at December 31, 2000. Management continues to stress asset quality as one of the strategic goals of the securities portfolio, which is evidenced by the investment of over 83% of the portfolio in U. S. Treasury and U. S. Government agency obligations. The REMIC and CMO issues held in the securities portfolio are entirely U. S. Government agency issues. In order to avoid excessive yield volatility from unexpected prepayments, Trustmark's normal practice is to purchase investment securities at or near par value to reduce the risk of premium write-offs.
Loans Loans, the largest group of earning assets, totaled 66.4% of earning assets at June 30, 2001, compared with 65.6% at December 31, 2000. At June 30, 2001, loans totaled $4.360 billion compared to $4.144 billion at year-end 2000, an increase of $215.7 million, or 5.2%. The Barret business combination contributed $307 million in loan growth, which has been offset by the first quarter mortgage loan sale. Excluding these two transactions, loans would have increased $100.4 million or 2.4%. Loan growth has remained stable, as traditional consumer lending has contracted, while mortgage and small business lending have expanded. Trustmark's lending policies have produced consistently strong asset quality. One measure of asset quality in the financial services industry is the level of nonperforming assets. Trustmark's nonperforming assets at June 30, 2001 and December 31, 2000, are shown in the following table ($ in thousands): June 30, Dec. 31, Nonperforming Assets 2001 2000 - -------------------- -------- -------- Nonaccrual and restructured loans $ 25,476 $ 15,958 Other real estate (ORE) 4,447 2,280 -------- -------- Total nonperforming assets $ 29,923 $ 18,238 ======== ======== Accruing loans past due 90 days or more $ 5,757 $ 2,494 ======== ======== Nonperforming assets/total loans and ORE 0.69% 0.44% ======== ======== At June 30, 2001, nonperforming assets and past due loans over 90 days (as seen in the preceding table) equaled $35.7 million, of which $8.3 million is the result of the Barret business combination. Management is not aware of any additional credits, other than those identified above, where serious doubts as to the repayment of principal and interest exist. At June 30, 2001, the allowance for loan losses was $73.9 million, representing 1.70% of total loans outstanding, compared to $65.9 million and 1.59%, respectively, at December 31, 2000. This increase is the direct result of the Barret business combination. At acquisition date, Barret's allowance for loan losses equaled $8.7 million. The allowance for loan losses is maintained at a level that Management and the Board of Directors believe is adequate to absorb estimated probable losses within the loan portfolio, including losses associated with off-balance sheet credit instruments such as letters of credit and unfunded lines of credit. A formal analysis is prepared monthly to assess the risk in the loan portfolio and to determine the adequacy of the allowance for loan losses. Specifically, the analysis considers any identified impairment, as well as historical loss experience in relation to volume and types of loans, volume and trends in delinquencies and nonaccruals, national and local economic conditions and other pertinent information. This analysis is presented to the Credit Policy Committee, with subsequent review and approval by the Board of Directors. Net charge-offs were $5.4 million or 0.26% of average loans at June 30, 2001, compared with $5.3 million or 0.26% of average loans at June 30, 2000. Trustmark's level of net charge-offs to average loans continues to compare favorably to those of peer banks. Other Earning Assets Federal funds sold and securities purchased under reverse repurchase agreements were $12.9 million at June 30, 2001, a decrease of $35.0 million when compared with year-end 2000. Trustmark utilizes these products as a short-term investment alternative whenever it has excess liquidity.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES Trustmark's deposit base is its primary source of funding and consists of core deposits from the communities served by Trustmark. Total deposits were $4.352 billion at June 30, 2001, compared with $4.058 billion at December 31, 2000, an increase of $293.5 million, or 7.2%. The increase during the first six months of 2001 is attributable to the $414 million contributed by the Barret business combination. Excluding the merger related growth, deposit balances have declined slightly as brokered CDs have matured. Trustmark continues to search for reasonably priced funding alternatives by evaluating new deposit products. Short-term borrowings consist of federal funds purchased, securities sold under repurchase agreements, FHLB borrowings and the treasury tax and loan note option account. Short-term borrowings totaled $1.621 billion at June 30, 2001, a decrease of $266.7 million, compared with $1.888 billion at December 31, 2000. This difference is primarily related to the utilization of a long-term borrowings category, which totaled $450 million at June 30, 2001, an increase of $200 million, when compared with December 31, 2000, and consisted entirely of FHLB advances. Significant funding remains available through FHLB borrowings. ASSET/LIABILITY MANAGEMENT Overview Market risk is the risk of loss arising from adverse changes in market prices and rates. Trustmark has risk management policies to monitor and limit exposure to market risk. Trustmark's market risk is comprised primarily of interest rate risk created by core banking activities. Interest rate risk is the risk to net interest income represented by the impact of higher or lower interest rates. Management continually develops and applies cost-effective strategies to manage these risks. The Asset/Liability Committee sets the day-to-day operating guidelines, approves strategies affecting net interest income and coordinates activities within policy limits established by the Board of Directors. A key objective of the asset/liability management program is to quantify, monitor and manage interest rate risk and to assist Management in maintaining stability in the net interest margin under varying interest rate environments. Market/Interest Rate Risk Management The primary purpose in managing interest rate risk is to effectively invest capital and preserve the value created by the core banking business. This is accomplished through the development and implementation of lending, funding, pricing, and hedging strategies designed to maximize net interest income performance under varying interest rate environments, subject to specific liquidity and interest rate risk guidelines. The primary tool utilized by the Asset/Liability Committee is a modeling system that provides information used to evaluate exposure to interest rate risk, project earnings and manage balance sheet growth. This modeling system utilizes the following scenarios in order to give Management a method of evaluating Trustmark's interest rate, basis and prepayment risk under different conditions: o Rate shocked scenarios of up-and-down 100, 200 and 300 basis points. o Yield curve twist of +/- 2 standard deviations of the change in spread of the three-month Treasury bill and the 10-year Treasury note yields. o Basis risk scenarios where federal funds/LIBOR spread widens and tightens to the high and low spread determined by using 2 standard deviations. o Prepayment risk scenarios where projected prepayment speeds in up-and- down 200 basis point rate scenarios are compared to current projected prepayment speeds. A static gap analysis is a tool used mainly for interest rate risk measurement, which highlights significant short-term repricing volume mismatches. Management's assumptions related to the prepayment of certain loans and securities, as well as the maturity for rate sensitive assets and liabilities are utilized for sensitivity static gap analysis. At June 30, 2001,
the balance sheet was liability-sensitive to interest rate movements with $1.063 billion more liabilities than assets scheduled to reprice within three months and $963 million scheduled to reprice within one year. At June 30, 2001, Trustmark's static gap analysis indicates that net interest income would benefit from additional decreases in market interest rates. Trustmark uses derivatives to hedge interest rate exposures by mitigating the interest rate risk of mortgage loans held for sale and mortgage loans in process. Trustmark regularly enters into derivative financial instruments in the form of forward contracts as part of normal asset/liability management strategies. Forward contracts, a type of derivative financial instrument, are agreements to purchase or sell securities or other money market instruments at a future specified date at a specified price or yield. Trustmark's obligations under forward contracts consist of commitments to deliver mortgage loans, originated and/or purchased, in the secondary market at a future date. During the second half of 2000, Trustmark began a strategy to utilize interest rate caps and floors, which will be implemented over time. The intent of utilizing these financial instruments is to reduce the risk associated with the effects of significant movements in interest rates. Caps and floors, which have not been designated as hedging instruments, are options that are linked to a notional principal amount and an underlying indexed interest rate. Exposure to loss on these options will increase or decrease as interest rates fluctuate. Liquidity Trustmark's goal is to maintain an adequate liquidity position to satisfy the cash flow requirements of depositors and borrowers while meeting the cash flow needs which Trustmark requires for growth. The Asset/Liability Committee establishes guidelines by which the current liquidity position is monitored to ensure adequate funding capacity. This is accomplished through the active management of both the asset and liability sides of the balance sheet and by maintaining accessibility to local, regional and national funding sources. The ability to maintain consistent earnings and adequate capital also enhances Trustmark's liquidity.
Part II. OTHER INFORMATION Item 1. Legal Proceedings There were no material developments for the quarter ended June 30, 2001, other than those disclosed in the Notes to Consolidated Financial Statements and Management's Discussion and Analysis of this Form 10-Q. Item 6. Exhibits and Reports on Form 8-K 1. There were no reports on Form 8-K filed during the second quarter of 2001.
SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRUSTMARK CORPORATION BY: /s/ Richard G. Hickson BY: /s/ Gerard R. Host ---------------------- ------------------ Richard G. Hickson Gerard R. Host President & Chief Treasurer (Principal Executive Officer Financial Officer) DATE: August 13, 2001 DATE: August 13, 2001